This blog covers all you need to know about reducing rate of interest in UAE.
To fulfill the customer requirements, banks and financial institutions in UAE offer various types of loans. But do you know how these banks calculate the interest rate for these various types of loans? It’s crucial to know the interest rate for your loan before getting any.
What is Reducing Rate of Interest in the UAE?
Reducing rate of interest is the interest rate calculated on your outstanding loan amount on a monthly basis. So, you have to basically pay EMI every month, which includes the principal repayment and the outstanding loan’s interest amount. After every EMI payment, your principal repayment amount is subtracted from the outstanding loan balance, resulting in reducing the loan amount. Then, the decreased outstanding loan balance is used for calculating the next month’s interest.
Understanding Reducing Rate of Interest with Example
Let’s take an example for betting understanding of this reducing interest rate concept in UAE.
Suppose you apply for a mortgage loan of AED 100,000 for five years tenure at a 5% reducing interest rate. Now, if you decide to pay AED 20,000 every year, you will have to pay AED 5,000 (100,000 x 5% = 5,000) in interest for the first year.
It means that the outstanding loan balance will be AED 80,000 for the next year. For the next, you will have to pay AED 4,000 in interest (80,000 x 5% = 4,000). In the third year, the outstanding balance will be 60,000, and you will have to pay AED 3000 in interest (60,000 x 5% = 3000).
Subsequently, you will pay AED 15,000 in interest for your loan for five years. Thus, reducing interest rate is a better and more preferred interest rate system than a flat rate of interest system.
However, the interest rate on your loan cannot be pre-determined by you, as it depends on the type of loan you’re applying for. The fixed interest rate is highly applicable for small amounts of loans like car loans or personal loans. But there’s no doubt that reducing rate of interest is more beneficial than a flat rate of interest.
So, you must avoid getting tempted by the low-interest rate and start reading the small prints before applying for any type of loan.
Related : Best Mortgage Rates in UAE 2022
Reducing Rate of Interest: How do Banks in UAE Calculate it?
Every major bank in the UAE only uses the reducing interest rate method to calculate the loan’s interest rate. However, some banks may advertise this interest rate’s flat version to make them more approachable to you. Typically, car loans and personal loan advertised interest rates in UAE are based on the Flat rate method. So, you must check the loan facility offer letter or the final agreement to determine your actual rate of interest before getting the loan.
You can take advantage of the various online platforms for comparing the interest rate for different types of loans in the UAE to know what’s best for you. But remember that reducing rate of interest is always the best option while taking a loan.